Coinbase just scored a rare win in its battle with the SEC. Judge Katherine Polk Failla has granted the crypto exchange an interlocutory appeal, which lets the company take its case to the Second Circuit Court of Appeals.
What does that mean? It means Coinbase can challenge the SEC’s claims that it’s breaking federal securities laws by running an unregistered exchange and broker-dealer, and by selling unregistered securities through its staking program. For now, the district court case? Completely on hold.
This decision comes after months of legal wrangling. Coinbase has been under fire, with the SEC accusing it of running operations that allegedly violate both the Securities Exchange Act of 1934 and the Securities Act of 1933.
But Coinbase has been saying their platform doesn’t fall under these laws, and now they have a chance to make their case to a higher court.
Coinbase goes after SEC’s legal playbook
A March 2024 ruling by Judge Failla was a mixed bag for Coinbase. She didn’t buy all of the SEC’s arguments, but she also didn’t dismiss everything Coinbase asked her to. The SEC has been pushing the claim that Coinbase’s operations, including its staking services, involve the sale of unregistered securities.
Coinbase, though, argues that these services don’t meet the legal definition of a security, especially under the infamous Howey test—the same test the SEC has been slapping on every crypto project in sight.
This appeal is a big deal. If the Second Circuit sides with Coinbase, it could completely change the trajectory of the case. Judge Failla herself admitted that an interlocutory appeal could “materially advance the ultimate termination of the litigation.”
Over the strenuous objection of @SECGov, Judge Failla has GRANTED our motion for leave to pursue an interlocutory appeal and STAYED the district court litigation. We appreciate the Court's careful consideration. On to the Second Circuit we go. pic.twitter.com/FuZ2jcYvfF
— paulgrewal.eth (@iampaulgrewal) January 7, 2025
Translation: this appeal could kill most of the SEC’s case. Coinbase says that 75% of the SEC’s claims hinge on allegations tied to the Securities Exchange Act. If those get thrown out, what’s left? Just the SEC’s beef with Coinbase’s staking program.
Now, why did Judge Failla say yes to the appeal? Because dragging this out in the lower court while the Second Circuit is already dealing with similar cases (like Ripple’s) would be a waste of everyone’s time. She pointed out that the SEC’s claims involve complex issues that deserve clarity—and fast.
SEC worries about piecemeal appeals
The SEC, of course, isn’t thrilled. They’ve been arguing that letting Coinbase appeal now could lead to a fragmented legal mess. They’re worried about multiple rounds of litigation, especially if the Second Circuit sends some claims back while Coinbase keeps appealing others.
But Judge Failla didn’t see it that way. She called the SEC’s concerns “not unwarranted” but said that the potential for a Second Circuit reversal outweighs any risks of inefficiency.
And then there’s the Major Questions Doctrine, which Coinbase has been waving like a flag. This legal argument says that regulatory agencies like the SEC can’t make sweeping economic rules without clear authorization from Congress.
The SEC thinks Coinbase will resurrect this argument during the appeal. Judge Failla acknowledged the possibility but shrugged it off, emphasizing that the real issue here is getting clarity on securities law.
Discovery chaos on hold for now
Let’s talk about discovery, the pretrial phase where both sides gather evidence. It’s been a nightmare. Judge Failla has already extended the discovery deadlines twice because the process has been so messy.
The SEC wants to dig into the ecosystems of 12 crypto tokens it named in its complaint, but that’s turning into a logistical black hole. Coinbase argued that pushing forward with discovery while the appeal is pending would be a waste of resources, and Judge Failla agreed.
Here’s the thing though. By granting the appeal and pausing the case, the court is basically hitting pause on a ton of legal drama. Judge Failla described this decision as necessary to prevent “hardship” and maintain an “even balance.”
In plain terms, she’s saying it’s better for everyone to wait and see what the Second Circuit decides before sinking more time and money into this.
The SEC wasn’t happy about this either. They tried to argue that the March 2024 ruling had already narrowed the scope of the case and that pressing forward wouldn’t be a huge burden. But Judge Failla pointed out that if the Second Circuit overturns her earlier rulings, it could completely reshape the case, making any discovery done now irrelevant.
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